How Does HD Supply Holdings's (NASDAQ:HDS) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, HD Supply Holdings (NASDAQ:HDS) shares are down a considerable 33% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 32% drop over twelve months.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for HD Supply Holdings
How Does HD Supply Holdings's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 10.26 that sentiment around HD Supply Holdings isn't particularly high. If you look at the image below, you can see HD Supply Holdings has a lower P/E than the average (11.1) in the trade distributors industry classification.
Its relatively low P/E ratio indicates that HD Supply Holdings shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
HD Supply Holdings's earnings made like a rocket, taking off 73% last year. Unfortunately, earnings per share are down 19% a year, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does HD Supply Holdings's Debt Impact Its P/E Ratio?
Net debt is 48% of HD Supply Holdings's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On HD Supply Holdings's P/E Ratio
HD Supply Holdings has a P/E of 10.3. That's below the average in the US market, which is 12.7. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What can be absolutely certain is that the market has become significantly less optimistic about HD Supply Holdings over the last month, with the P/E ratio falling from 15.4 back then to 10.3 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than HD Supply Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
